Tucker Carlson’s Wet Fiscal Cliff Dream

(Sven Larson is an economist wit The Wyoming Liberty Group and a regular guest in The Morning Zone on Friday at 8:07 AM MST. Here is his latest column)

After having been steaming toward the fiscal cliff for some 507 days, on New Year’s Eve the U.S. economy was shifted over into a somewhat less irresponsible track. The deal now signed by President Obama keeps current income tax rates in place for most Americans, basically limiting the tax increase for Mr. and Mrs. Jones to the expiration of a temporary social security tax cut and the new Obamacare taxes.

These tax increases are not insignificant and will slim down the margins for regular families who are struggling to get back on track after a long, hard and deep recession. Squeezing consumers with higher taxes is always a bad idea, and this tax hike is particularly poorly timed. It comes just as the economy seems to be gaining a little bit of growth momentum, with even some signs that the housing market is recovering. When people are more willing to buy homes, they have stronger confidence in the future. Consumers also exhibited improving confidence in that car sales were notably strong in December.

Higher taxes will no doubt harm the recovery, but these tax hikes won’t harm the economy by nearly as much as if we had been forced over the edge of the fiscal cliff.

So all in all, this is what we could – and should – expect from a government that is split between Democrats and Republicans, with a fiscally incompetent president and an ideological chasm running through Capitol Hill. Things will get a little tougher in 2013, but not by much. (But do keep an eye on what is happening in your state and your local community – they may very well have plans for higher income, sales, gasoline and property taxes.)

If someone had woken you from a dead sleep 20 years ago and asked what the Republican Party stood for, you would’ve had no trouble answering: Fiscal restraint, a strong national defense and lower taxes. Those were the three pillars of the GOP. The party’s brand was clear. Voters understood it, and many approved. In the days before Obama, Republicans won seven out of ten presidential elections.

And in seven out of ten cases those Republican presidents signed bills that increased spending. Actually, they signed spending increases a lot more often than that. In fact, Ronaldus Magnus signed one of the most important expansions of pre-SCHIP Medicaid. George Bush Sr. ran away from his promise not to raise taxes and George Bush Jr. chose to grow Medicare over free-market health care reforms.

The question, alas, is really what those presidential victories were all about. Of course, Carlson and Patel don’t answer it. They accelerate their anti-GOP rant:

Things have changed for the muddier. Scratch the surface and you’ll find there is no longer a consensus among Republicans on foreign policy. Fiscal restraint? Years of earmarks, record deficits and at least one new federal entitlement under Republican congresses make that idea a bitter joke. Of the three principles that have united the party since Reagan, only taxes remain.

Federal Aid to States, an umbrella name for one thousand spending programs jointly funded by the federal and state governments, helps pay for core welfare-state functions such as Medicaid, public education, welfare, child care and public housing. These programs have expanded by 6-8 percent per year over the past two decades. It has not made a dime’s worth of difference who controls the White House or Congress.

Today Federal Aid to States sends more than half-a-trillion dollars to the states each year, a sizeable portion of total federal spending. In fact, I never hear Tucker Carlson demand a phase-out of these monstrous welfare-state programs. Who is he to criticize mainstream Republicans for just continuing to make the same old deals with Democrats?

And what with this romanticism around the Reagan presidency? Yes, he was an incredibly inspiring conservative leader, and yes, he represented unabashed patriotism and strength on foreign policy. But he made the monumental mistake of cutting taxes without structurally cutting spending. In doing so he laid the groundwork for future tax hikes – or an unprecedented accumulation of government debt.

Carlson and Patel refuse to address these issues. Instead they lament to high heaven that Republicans committed sacrilege and agreed to limited tax increases in a deal with a Democrat-controlled Senate and a Democrat-controlled White House:

Republicans have been able to claim — sincerely, and with continuing success at the ballot box — that they are for lower taxes. Until Tuesday. Here’s what happened: For reasons that aren’t entirely clear but are probably related to panic and a basic lack of principle, the Speaker of the House and other Republicans in Congress signed on to Democratic calls for “balance” between tax hikes and spending cuts — this despite the overwhelming evidence that spending is the real problem. So, even before the negotiation began, they abandoned decades of principle on taxes.

I agree that no tax hikes is better than some tax hikes. But let’s not get carried away here. If this was such an unprecedented event, then why did not the Republican-led Congress, joined by a Republican president, make the Bush tax cuts permanent? Why did they agree to have them expire after ten years, so you now basically have to pass annual extension bills?

More importantly – and again back to my point about Reagan: if you want to cut taxes permanently you have to cut spending permanently. You start with that; a pledge to not raise taxes becomes hollow if you try to restrain or cut spending as an afterthought.

Carlson and Patel do acknowledge that Republicans have not worked hard enough on the spending side, but again they put the tax-cut carriage before the spending-cut horse, and tie their rhetoric to the fiscal cliff issue:

The result: Two months later, we have a deal, but no balance. It’s all tax hikes. … Many contended Republicans had no choice. The effects of the fiscal cliff were so severe, they said, that a deal — any deal — was imperative. Republicans would be blamed if negotiations fell through. Recognize this argument? It’s common on Wall Street, where nothing matters but the next fiscal quarter. It pretty much sums up why America is in such steep decline.

Exactly what is their point? That if you only control the House you pout if you don’t get everything you want? Or that the fiscal cliff would have been better for the country than half-measure of a deal we got now?

[When] it comes to our country’s finances, it’s considered wild, even reckless, to think about anything but the few months ahead. Nobody’s surprised that politicians make shortsighted decisions. They have elections to win. Voters often claim to want limited government, but the evidence suggests they love government largess even more, and this puts elected officials in a tough spot.

That’s actually not true. Opinion polls consistently show that Americans want smaller government with fewer programs. Furthermore, I don’t think Carlson and Patel understand the mechanics of government spending: you don’t have to do anything as a legislator to grow government. All you have to do is sit around and protect baseline budgeting and the growth parameters that are built in to most of our entitlement programs.

In other words, no one has to want a bigger government. All big government needs to become even bigger is people who aren’t actively working to end its growth. This gives a bit of a bad taste to Carlson’s and Patel’s cynicism.

[Virtually] everyone in this country with the power to persuade has lost the willingness to look beyond next Tuesday. Nobody liked the spending cuts wrapped into the fiscal cliff. Democrats don’t like spending cuts in general, and Republicans were rightly upset that most of the cutting came from defense and none from entitlements. But at least Congress would have been forced to reduce federal spending, the one thing we really need. According to CBO projections, going over the cliff would have hurt in the short term, but within a year would have left the economy stronger, bringing unemployment down to 5.5 percent by 2018.

This is the same CBO that said Obamacare was fiscally neutral. That aside, though, will someone please wake Tucker Carlson from his wet fiscal cliff dream? There is no way on God’s Green Earth that the fiscal cliff would have been a better deal for America. I find it entirely inconceivable that a sober, straightforward, unbiased macroeconomic analysis would show that higher taxes and spending cuts could improve the U.S. economy at any point in time.

Then again, that’s what they have been saying about Greece. Yet five years of macroeconomic evidence shows that the combination of higher taxes and spending cuts depresses the economy – and, let’s not forget, the longer that combination is allowed to dictate fiscal policy, the depression will continue and get deeper.

Carlson and Patel finish with a quip about how we are now heading for the Greek situation. But this is not just uninformed – it is a downright stupid comment. The evidence is overwhelmingly to the contrary: the current deal puts more distance between us and Greece than the fiscal cliff would have done. In case anyone is in doubt, here is the pile of evidence.

Again: it is not very fun to have to sit here and defend a bill in Congress that raises taxes for anyone. But at the end of the day the Republicans who voted for the deal did the right thing. The alternative was to let the country be hurled into an austerity abyss so deep we’d probably never see the light of day again.

In the choice between the stupid and the downright stupid, I prefer stupid.

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